<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission File # 0-15187
IFX CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3399452
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 West Adams Street, Suite 1460, Chicago, Illinois 60606
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(312) 419-9530
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X YES NO
----- ----
As of the date of this report, the issuer had outstanding 6,655,539 shares of
common stock, $.02 par value per share.
1
<PAGE>
IFX CORPORATION AND SUBSIDIARIES
Part I - Financial Information
Item 1. Financial Statements
Immediately following this page, the following financial information of the
Registrant is filed as part of this Report.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated statements of financial condition
as of December 31, 1998 and June 30, 1998. 3
Consolidated statements of operations for the
three months and six months ended December 31,
1998 and 1997. 4
Consolidated statements of cash flows for the
six months ended December 31, 1998 and 1997. 6
Notes to consolidated financial statements. 7
</TABLE>
2
<PAGE>
IFX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
ASSETS
December 31, June 30,
1998 1998
----------- -----------
(Unaudited) (Audited)
<S> <C> <C>
Cash $ 290,900 $ 535,200
Short-term investments 39,779,600 36,068,800
Receivables:
Brokers and dealers 2,144,100 4,573,100
Customers 1,551,900 1,646,800
Affiliates 190,400 54,600
Other 2,072,200 1,452,600
Less- Allowance for doubtful accounts (91,100) (358,900)
----------- -----------
5,867,500 7,368,200
Investments in and advances to affiliated
partnerships 340,300 134,200
Notes receivable 810,300 811,400
Furniture, equipment and leasehold
improvements, net of accumulated
depreciation and amortization of
$424,100 and $298,800, at December 31,
and June 30, 1998, respectively. 222,900 143,000
Other assets 560,500 293,100
----------- -----------
Total $47,872,000 $45,353,900
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Payables:
Brokers and dealers $ 1,208,600 $ 863,100
Customers and counterparties 28,460,800 29,632,900
Affiliates and employees 106,300 -
Accounts payable and accrued expenses 2,272,600 1,601,200
----------- -----------
Total payables 32,048,300 32,097,200
Minority interest 2,016,300 1,921,500
Stockholders' equity:
Common stock, $.02 par value;
150,000,000 shares authorized,
6,655,539 and 6,155,539 issued and
outstanding at December 31, and June
30, 1998, respectively. 133,100 123,100
Paid-in-capital and retained earnings 13,674,300 11,212,100
----------- -----------
Total stockholders' equity 13,807,400 11,335,200
----------- -----------
Total $47,872,000 $45,353,900
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
<PAGE>
IFX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenues:
Commissions $ 91,500 $ 319,200
Interest 556,100 686,300
Trading gains, net 1,585,000 1,472,900
Earn-out from Sale of Assets 1,176,300 1,148,800
Other (67,100) 10,400
---------- ----------
Total revenues 3,341,800 3,637,600
---------- ----------
Expenses:
Commission and brokerage 310,400 192,500
Compensation and related benefits 796,500 475,000
Communications 158,400 180,100
Interest 351,500 424,600
Rent and other occupancy 193,600 215,000
Business promotion 96,400 98,300
Professional and consulting fees 248,100 256,900
Depreciation 48,800 45,300
Other (66,100) 154,900
---------- ----------
Total expenses 2,137,600 2,042,600
---------- ----------
Income before income taxes and minority interest 1,204,200 1,595,000
Income tax expense 455,900 598,800
---------- ----------
Net income before minority interest 748,300 996,200
Minority interest 99,200 222,800
---------- ----------
Net income $ 649,100 $ 773,400
========== ==========
Basic earnings per share:
Net income $ .10 $ .12
========== ==========
Weighted average number of
Common shares outstanding 6,397,496 6,279,130
========== ==========
Diluted earnings per share:
Net income $ .09 $ .12
========== ==========
Weighted average number of
Common shares outstanding 7,501,891 6,279,130
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
IFX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenues:
Commissions $ 334,900 $ 432,100
Interest 1,205,600 1,715,800
Trading gains, net 2,934,100 3,544,700
Earn-out from Sale of Assets 2,448,600 1,934,300
Other (35,900) 10,400
---------- ----------
Total revenues 6,887,300 7,637,300
---------- ----------
Expenses:
Commission and brokerage 500,700 363,700
Compensation and related benefits 1,407,400 1,101,300
Communications 341,000 378,700
Interest 695,700 1,111,800
Rent and other occupancy 515,800 393,300
Business promotion 219,600 218,400
Professional and consulting fees 400,700 502,500
Depreciation 88,400 97,100
Other 50,700 306,000
---------- ----------
Total expenses 4,220,000 4,472,800
---------- ----------
Income before income taxes and minority interest 2,667,300 3,164,500
Income tax expense 945,300 965,100
---------- ----------
Net income before minority interest 1,722,000 2,199,400
Minority interest 249,800 538,300
---------- ----------
Net income $1,472,200 $1,661,100
========== ==========
Basic earnings per share:
Net income $ .24 $ .26
========== ==========
Weighted average number of
common shares outstanding 6,261,517 6,279,130
========== ==========
Diluted earnings per share:
Net income $ .22 $ .26
========== ==========
Weighted average number of
common shares outstanding 6,612,624 6,279,130
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
IFX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
-----------------------------
1998 1997
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,472,200 $ 1,661,100
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 48,800 97,100
Deferred taxes - (6,000)
Doubtful accounts expense - (30,100)
Equity in net gain in partnership investments (30,900) (17,900)
Changes in:
Short-term investments (3,710,800) 6,300,900
Receivables 1,475,700 1,122,600
Other assets (267,400) 94,500
Payables (695,300) (11,546,400)
Accounts payable and accrued expenses 671,400 (372,800)
----------- ------------
Cash provided by (used in) operating activities (1,036,300) (2,697,000)
----------- ------------
Cash flows from investing activities:
Decrease (increase) in notes receivable 1,100 (201,500)
Purchase of furniture, equipment and leasehold
improvements (128,700) (15,000)
Investments in/advances to partnerships (175,200) -
----------- ------------
Cash provided by (used in) investing activities (302,800) (216,500)
----------- ------------
Cash flows from financing activities:
Repayment of notes payable - (750,000)
Minority interest 94,800 478,300
Issuance of stock 1,000,000 -
----------- ------------
Cash provided by (used in) financing activities 1,094,800 (271,700)
----------- ------------
Increase (decrease) in cash (244,300) (3,185,200)
Cash, beginning of period 535,200 3,279,300
----------- ------------
Cash, end of period $ 290,900 $ 94,100
=========== ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
6
<PAGE>
IFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Basis of Presentation
- ---------------------
The consolidated financial statements include the accounts of IFX
Corporation (formerly Jack Carl/312-Futures, Inc., "JC/312") and Subsidiaries,
(collectively, the "Company" or "IFX"). All material intercompany accounts and
transactions have been eliminated in consolidation. Until July 1, 1996, the
Company engaged principally in the business of effecting transactions in futures
and options on futures contracts for the accounts of customers and the operation
of commodity pools. Index Futures Group, Inc. ("Index"), until July 1, 1996, was
the principal operating subsidiary of JC/312. Effective July 1, 1996, Index
sold, transferred and assigned substantially all of its brokerage accounts
("Sale of Assets") to E.D. & F. Man International Inc. ("MINC"). Index ceased
being a registered futures commission merchant with the Commodity Futures
Trading Commission ("CFTC") in December, 1996. As a condition of the Sale of
Assets, Index changed its name to FX Chicago, Inc. IFX, Ltd. (formerly Index FX,
Ltd.), a British corporation and a majority owned subsidiary of IFX Corporation,
continues to conduct foreign exchange business as a registrant of the British
Securities and Futures Authority.
Following the Sale of Assets, the Company decided not to reinvest the sales
proceeds in its commodities brokerage business and has been exploring other
industries and business opportunities. Based on its research, the Company has
determined that the Internet and telecommunications industries present the
greatest opportunities for the Company's future investment and growth, though
the risks associated with these lines of business are extremely high.
Accordingly, the Company intends to pursue the development and acquisition of
Internet services and telecommunication businesses with the proceeds from the
Sale of Assets, joint ventures and private equity offerings.
In November 1998, the Company entered into an agreement with International
Technology Investments, LC ("International Technology") to jointly acquire
Internet services and make investments in Internet-related businesses in Latin
America and other international markets. To accomplish this, a new company,
Emerging Networks, Inc. ("ENI") was formed. ENI, a wholly owned subsidiary of
IFX, signed a letter of intent in early January 1999 to acquire International
Connection Service of Venezuela, a comprehensive Internet Service Provider
("ISP") serving customers throughout Venezuela. Other such acquisitions are
being investigated; however the Company has not entered into any definitive
agreements or understandings with respect to the Venezuela acquisition nor any
other such transactions. There can be no assurance that the Company will
complete any such transactions, nor that any of these ventures will ultimately
be profitable. IFX/Communications Ventures, Inc., also a wholly owned subsidiary
of IFX, was formed to serve as the central network facilitator, responsible for
managing, billing and administering all ISP equipment and as a provider of
related mergers and acquisitions expertise within the Company at such time, if
any, that ENI requires such services.
7
<PAGE>
IFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In December 1998, the Company, through its newly formed, wholly owned
subsidiary, IFX/Telcom, Inc., acquired a 25% limited partnership interest in
Telcom.Net, L.P., a domestic telecommunications and Internet software
development company that was co-founded in 1997 by Joel M. Eidelstein, the
Company's President. The limited partnership interest entitles IFX/Telecom, Inc.
to receive priority distributions of up to $200,000, the amount of the Company's
invested capital, and after all of its other partners have received priority
distributions equal to their aggregate invested capital, 25% of the profits of
Telcom.Net, L.P.
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation have been reflected in these
condensed consolidated financial statements. Operating results for the quarter
and the six months ended December 31, 1998, are not necessarily indicative of
the results that may be expected for the year ending June 30, 1999. Certain
reclassifications have been made in the 1998 financial statements to conform to
the fiscal 1999 presentation. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's financial
statements on Form 10-K for the year ended June 30, 1998.
Commitments and Contingencies
- -----------------------------
Litigation-
- -----------
The Company is a defendant in, and may be threatened with, various legal
proceedings arising from its regular business activities. Management, after
consultation with legal counsel, is of the opinion that the ultimate liability,
if any, resulting from any pending action or proceedings will not have a
material effect on the financial position or results of operations of the
Company.
On November 24, 1997, the trustee of two pension plans filed a Demand for
Arbitration with the National Futures Association against Index and several
other respondents, including an introducing broker guaranteed by Index (Kenneth
-------
N. Korsah, MD PA v. LFG L.L.C. et al., NFA arbitration case number 97-ARB-185).
- -------------------------------------
In the Demand, the trustee alleged breach of fiduciary duty, churning,
misrepresentation, failure to supervise, breach of contract, aiding and
abetting, and violation of ERISA. Claimant sought actual damages of $141,000 and
punitive damages of $460,000. The Company settled the claim in October, 1998 for
a payment of $10,000.
8
<PAGE>
IFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On May 16, 1996, Index filed suit in the Circuit Court of Cook County--Law
Division against Doug Niemann, a former customer, for breach of contract,
seeking to recover a debit balance of $88,200 (Index Futures Group, Inc. v. Doug
---------------------------------
Niemann, case no. 96L-5506). On January 14, 1997, Niemann filed a counterclaim
- -------
for $688,200. The Company believes that the counterclaim is without merit and
will defend vigorously.
In April 1994, Index without admitting or denying the allegations, paid
$100,000 to the CFTC, settling an administrative action filed on September 29,
1992. In a related action, the equity receiver of a commodity pool operator
brought an action to recover losses of approximately $600,000, alleging various
theories such as constructive trust, negligence, breach of fiduciary duty and
conversion. On May 29, 1996, the district judge dismissed the complaint in its
entirety. On December 4, 1997, the Court of Appeals affirmed the district
judge's dismissal of all claims against Index. On January 13, 1998, the Court of
Appeals denied the Supplemental Plaintiffs' request for a rehearing of its
appeal. On October 2, 1998, the attorney for the equity receiver of the
commodity pool filed a class-action suit on behalf of a putative class composed
of persons who had given money to the commodity pool operator to invest, some of
which was deposited in brokerage accounts at Index by the commodity pool
operator. (Wesselhoff v. FX Chicago, Inc. et al., Circuit Court of Cook County,
-------------------------------------
Chancery Division, case number 98-CH-13396). The plaintiff seeks damages of
$600,000 plus prejudgment interest, punitive damages, and lost investment
opportunity. The Company believes that the allegations in the complaint against
FX Chicago, Inc. and the Company are without merit and will defend vigorously.
A former officer of Index whose employment was terminated as a result of
the Sale of Assets rejected Index's severance payment offer. The officer had
made a demand for $500,000. The Company settled this case in July, 1997 for
$75,000.
A German citizen, seeking damages of 6,403,519.19 Deutschmark
(approximately $4,000,000 given the exchange rate as of September 15, 1998),
filed a lawsuit in September 1998, in Germany, against an affiliate of MINC. The
complaint arises out of transactions that occurred in an account introduced by
Index Futures Group, AG ("Index AG"), an introducing broker of Index, prior to
the Sale of Assets. The Plaintiff alleges that under German law, MINC's
affiliate is successor to Index AG, and thus assumed any liabilities of Index
AG. Pursuant to the Sale of Assets agreement, Index is responsible for any
liability "arising out of any state of facts with respect to such Assigned
Contract existing on or prior to the Closing Date". MINC has retained counsel in
Germany to represent its interests in this matter. As Index AG was an
introducing broker of Index and not a former subsidiary of the Company or Index,
the Company does not believe that it will ultimately be liable for damages. The
Company had requested but has not received regular updates from MINC, and,
accordingly, the Company does not have information as to the extent of any
potential liability under the suit nor legal costs required to defend such suit,
at the present time.
9
<PAGE>
IFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On October 27, 1998, a complaint was filed by James Feltman as liquidating
agent of L. Luria & Son, Inc. (Case No. 97-16731-BKC-RAM) seeking recovery from
the Company of $368,188.84. Starting in the winter of 1996, the Company entered
into an arrangement with the suppliers of L. Luria & Son, Inc. pursuant to which
the Company advanced funds on behalf of L. Luria & Son, Inc. in order to allow
it to purchase inventory. L. Luria & Son, Inc. reimbursed the Company for
amounts that it had advanced. The complaint alleges that the Company was an
insider of L. Luria & Son, Inc. because of Joel Eidelstein's relationship to L.
Luria & Son, Inc. and that the amounts that L. Luria & Son, Inc. paid the
Company constituted preferences under the Bankruptcy laws. Subsequent to
December 31, 1998, the Company reached an oral agreement to settle this
complaint for $90,000.
On December 28, 1998, a claimant, Blazina, filed an NFA arbitration against
Index and others, alleging breach of fiduciary duty, fraud, breach of contract
and negligence in the solicitation and trading of a series of managed accounts
opened at Index in 1995. Claimant seeks an award of $500,000, composed of
alleged actual damages of $262,500, punitive damages of $170,000 and various
other costs and fees. The Company believes that the allegations are without
merit and will defend vigorously.
Other-
- ------
The Company has entered into a consulting contract with an affiliate. This
contract provides for annual payments of $24,000.
Index issued a limited indemnification agreement to MINC related to the
Sale of Assets. This agreement covers potential customer claims arising from
activity prior to the sale.
The Company has guaranteed certain liabilities owed by Telcom.Net, L.P. to
Qwest / LCI, International. Joel Eidelstein, President of IFX, is the sole
shareholder of one of the general partners of Telcom.Net, L.P. and the Company
itself is a limited partner in this limited partnership. There is no maximum
amount payable under this guarantee. However, the Company does not expect that
the potential liability will exceed $100,000 based on the business of the
limited partnership.
10
<PAGE>
IFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Sale of Assets
- --------------
The purchase price payable by MINC in connection with the Sale of Assets is
based on a percentage of the net income, as defined in the Sales Agreement, of
the transferred activities during the sixty-six month period following the sale.
During the three months and six months ended December 31, 1998 the Company
earned $1,176,300 and $2,448,600, respectively from the Sale of Assets. During
the three months and six months ended December 31, 1997 the Company earned
$1,148,800 and $1,934,300 respectively from the Sale of Assets. Reported
revenues during previous quarters of fiscal 1999, 1998 and 1997 were adjusted by
MINC and increased by $203,100 and $486,100 for the three and six months ended
December 31, 1998, respectively. These adjustments are included in the earnings
from the Sale of Assets for the three and six months ended December 31, 1998.
Employee Stock Option Grant
- ---------------------------
In November, 1998, the Board of Directors granted to the Company's
President, an option to purchase 300,000 shares of Common Stock, exercisable at
$3.00 per share (the price of the stock as reported by the NASDAQ Stock Market
as of the date of the grant was $1.75 per share). This option vested 25% on each
of November 10, 1998 and January 1, 1999 and will vest an additional 25% on each
of January 1, 2000 and January 1, 2001. The grant of the stock option was
formally approved by the shareholders of the Company at its annual meeting on
February 3, 1999. The portion of the option for 75,000 shares which vested in
the quarter ended December 31, 1998 was considered dilutive for the earnings per
share calculation for the three months ended December 31, 1998 and accordingly,
is included in that calculation for period of time during which it was
outstanding. The option was not considered dilutive for the six months ended
December 31, 1998.
Sale of Stock and Stock Option Grant
- ------------------------------------
As previously mentioned, the Company entered into an agreement with
International Technology and another major shareholder pursuant to which the
Company formed ENI and other related companies to pursue opportunities in
providing Internet services in Latin America and other international locales. In
connection with that agreement, the Company issued to International Technology
500,000 shares of Common Stock for $1,000,000 on November 23, 1998. The Company
also granted International Technology the right to purchase up to 5,500,000
additional shares of Common Stock, at a price of $2.00 per share. This option
was considered dilutive for the earnings per share calculation for the three and
six months ended December 31, 1998 and accordingly, is included in those
dilutive earnings per share calculations for the period of time during which it
was outstanding.
11
<PAGE>
IFX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Capital Requirements
- --------------------
IFX Ltd. became a registrant of the British Securities and Futures
Authority ("SFA") during November, 1996. As such, IFX Ltd. is subject to the
financial resources requirements adopted and administered by the SFA. As of
December 31, 1998, IFX Ltd.'s financial resources, as defined by the SFA, were
approximately $4,808,000, which was approximately $1,463,000 in excess of its
requirements.
12
<PAGE>
IFX CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Period Ended December 31, 1998.
Overview
- --------
IFX Corporation (formerly Jack Carl/312-Futures, Inc.), (which when
consolidated with its subsidiaries is henceforth referred to as the "Company" or
"IFX") is a holding company which operates its business through its
subsidiaries. Index Futures Group, Inc. ("Index"), which until July 1, 1996 was
the Company's principal operating subsidiary, provided a full range of futures
brokerage, clearing and back office services for institutional and public
commodity traders. It was a clearing member of all major U.S. commodity
exchanges. Effective July 1, 1996, Index sold, transferred and assigned
substantially all of its brokerage accounts ("Sale of Assets") to E.D.& F. Man
International, Inc. ("MINC"). As a result of the Sale of Assets, Index no longer
acts as a futures commission merchant. It immediately withdrew as a clearing
member from all commodity exchanges, and terminated its registration as a
futures commission merchant in December, 1996. As a condition of the Sale, Index
changed its name to FX Chicago, Inc. Operations at FX Chicago, Inc. are
currently limited to activity relating to the net income derived from the Sale
of Assets. IFX Ltd. (formerly Index FX, Ltd.), a British corporation and a
subsidiary of IFX Corporation continues to conduct foreign exchange business as
a registrant of the British Securities and Futures Authority ("SFA"). IFX Ltd.
commenced trading operations in October, 1995 and became an SFA registrant in
November, 1996.
Following the Sale of Assets, the Company decided not to reinvest the sales
proceeds in its commodities brokerage business and has been exploring other
industries and business opportunities. Based on its evaluation, the Company has
determined that the Internet and telecommunications industries present the
greatest opportunities for the Company's future investment and growth, though
the risks associated with these lines of business are extremely high.
Accordingly, the Company intends to pursue the development and acquisition of
Internet services and telecommunication businesses with the proceeds from the
Sale of Assets, joint ventures and private equity offerings.
In November 1998, the Company entered into an agreement with International
Technology Investments, LC ("International Technology") to jointly acquire
Internet services and make investments in Internet-related businesses in Latin
America and other international markets. To accomplish this, a new company,
Emerging Networks, Inc. ("ENI") was formed. ENI, a wholly owned subsidiary of
IFX, signed a letter of intent in early January 1999 to acquire International
Connection Service of Venezuela, a comprehensive Internet Service Provider
("ISP") serving customers throughout Venezuela. Other such acquisitions are
being investigated; however the Company has not entered into any definitive
agreements or understandings with respect to the Venezuela nor any other such
transactions. There can be no assurance that the Company will complete any such
transactions, nor that any of these ventures will ultimately be profitable.
IFX/Communications Ventures, Inc., ("CVI") also a wholly owned subsidiary of
IFX, was formed to serve as the central network facilitator, responsible for
managing, billing and administering all ISP equipment and as a provider of
related mergers and acquisitions expertise within the Company at such time, if
any, that ENI requires such services.
13
<PAGE>
In December 1998, the Company, through its wholly owned subsidiary,
IFX/Telcom, Inc., acquired a limited partnership interest in Telcom.Net, L.P., a
domestic telecommunications and Internet software development company that was
co-founded in 1997 by Joel M. Eidelstein, the Company's President. The limited
partnership interest entitles IFX/Telcom, Inc. to receive priority distributions
of up to $200,000, the amount of the Company's invested capital, and after all
of its other partners have received priority distributions equal to their
aggregate invested capital, 25% of the profits of Telcom.Net, L.P.
Liquidity and Capital Resources
- --------------------------------
The Company maintains a highly liquid balance sheet with a majority of the
Company's assets consisting of short-term investments, which are reflected at
market. IFX Ltd.'s role as a market maker in spot and forward foreign exchange
markets for customer activities results in significant levels of customer-
related balances on the Company's statement of financial condition.
The Company's cash and short-term investment portfolio totaled $40,070,500
at December 31, 1998. Included in this amount is approximately $28,041,000 of
funds from IFX Ltd. customers, which have been invested by IFX Ltd. on the
customers' behalf or are held in segregated cash accounts, pursuant to rules of
the SFA. The Company's positions are generally liquid. The portfolio is invested
primarily in U.S. dollar denominated securities, but also includes foreign
currency positions deposited by IFX customers.
As a registrant, IFX Ltd. is subject to the financial resources
requirements adopted and administered by the SFA. As of December 31, 1998, IFX
Ltd.'s financial resources, as defined by the SFA, were approximately
$4,808,000, which was approximately $1,463,000 in excess of its requirements.
Stockholders' equity at December 31, 1998 was $13,807,400. Outstanding
shares of Common Stock as of December 31, 1998 totaled 6,655,539.
The Company continues to repurchase and retire shares of its Common Stock,
pursuant to a repurchase program that permits the Company to purchase up to
1,000,000 shares. The Company did not repurchase any shares pursuant to this
program during the quarter and the six months ended December 31, 1998.
The Company issued 500,000 shares of Common Stock to International
Technology for $1,000,000, effective November 23, 1998. Additionally, IFX has
granted International Technology the right to purchase up to 5,500,000
additional shares of Common Stock at a price of $2.00 per share. These
transactions were subject to shareholder approval which was obtained at the
Company's Annual Meeting on February 3, 1999.
As of June 30, 1998, the Company had lease commitments outstanding of
approximately $2,100,000 through the year 2002. The majority of this commitment
related to space leased in Chicago. While the Company remains legally committed
under terms of the lease, subsequent to June 30, 1998, the Company subleased
its' office space in Chicago through the end of the lease term. The Company has
signed a sublease to occupy a much smaller space in Chicago through June 1999,
providing for aggregate lease payments of approximately $70,000.
For the six months ended December 31, 1998, cash used by operations was
$1,036,300 compared to cash used in operations of $2,697,000 for the same period
in fiscal 1998. The majority of cash provided by or used in operations is
related to customer funds from customers of IFX Ltd. Cash flows from
14
<PAGE>
operations include the changes in invested customer funds and customer payables,
and vary depending on the amount of excess customer funds at a given time. In
addition, the Company invests cash not needed for operations at FX Chicago, Inc.
in short-term investments such as U.S. Government obligations and overnight time
deposits. As of December 31, 1998, the Company held $7,775,000 in such short-
term investments.
Management believes existing cash and short-term investments together with
operating cash flows, access to equity capital, and borrowing capacity through
its principal stockholder, provide adequate resources to fund ongoing operating
requirements and future capital expenditures related to the expansion of
existing businesses and development of new projects. Additionally, the
outstanding stock options discussed elsewhere in this report could provide a
significant amount of additional capital should they be exercised.
Year 2000
- ---------
The Company currently is evaluating its information and non-information
technology infrastructure for Year 2000 compliance. The Company does not expect
that the cost to modify its information technology infrastructure to be Year
2000 compliant will be material to its financial position or results of
operations. The Company does not anticipate any material disruption in its
operations as a result of any failure by the Company to be in compliance, and
the majority of the Company's suppliers have indicated that they are in the
process of or have already achieved Year 2000 compliance. In the event that any
of the Company's significant suppliers or customers does not successfully and
timely achieve Year 2000 compliance, the Company's business and results of
operations could be adversely affected.
Results of Operations
- ----------------------
IFX Ltd., the Company's London-based operation and its primary operating
subsidiary, appears to be experiencing a slow-down of its growth in recent
months. Its future prospects are less certain, in light of recent market events,
including the stock-market turmoil and its related effect on hedge funds along
with growing uncertainty in foreign markets. If there is a resulting overall
tightening of credit, lenders may place greater emphasis on a borrower's balance
sheet, a fact that could impede both the operations and growth of IFX, Ltd.'s
business. In addition, the Company is concerned that the implementation of a
single European currency as a result of the European Monetary Union may greatly
reduce the profit opportunities available from foreign currency trading. On the
other hand, the Company's earnings from the Sale of Assets have continued to
increase during the six months ended December 31, 1998, as MINC generates
additional business from the brokerage accounts it purchased from Index, and
reduces the costs associated with that business. These earn-out revenues have
somewhat offset the reduction in earnings by IFX, Ltd. Additionally, MINC paid
the Company additional income on this business during the three and six months
ended December 31, 1998 that was related to prior periods. However, pursuant to
the Sale of Assets agreement, the Company's percentage of earnings from the
brokerage accounts will decrease based upon a predetermined schedule over the
remainder of the original sixty-six month period following the sale. As such,
earnings from the Sale of Assets will decrease accordingly. The first reduction
is scheduled to take place with the quarter ended March 31, 1999.
Revenues were $3,341,800 and $6,887,300 during the three and six months
ended December 31, 1998, respectively, representing a decrease of 8% and 10%,
respectively, from the same periods a year ago. While trading revenues
15
<PAGE>
increased 8% for the three months ended December 31, 1998, compared to the same
period a year ago, they decreased 17% for the six months ended December 31,
1998, when compared to the same period a year ago. This decrease was largely due
to volatility in the foreign currency markets during the period. This market
volatility likely contributed to a reduction of trading activity by IFX, Ltd.'s
customers who are sensitive to perceived increased risk in the foreign currency
markets. Interest income decreased by $130,200 and $510,200 for the three and
six months ended December 31, 1998, respectively, a decrease of 19% and 30%,
respectively, compared to the same periods a year ago. Lower market interest
rates together with a decrease in IFX Ltd. customer funds on deposit contributed
to lower overall interest income for the three and six months ended December 31,
1998.
Revenues from the Sale of Assets increased by $27,500 and $514,300 during
the three and six months ended December 31, 1998, respectively. This represents
an increase of 2% and 27%, respectively, from the same periods a year ago. This
increase includes $203,100 and $486,100 for the three and six months ended
December 31, 1998, respectively, that was paid to the Company by MINC as
additional income related to prior fiscal quarters of fiscal 1997, 1998 and
1999. These adjustments are included in the earnings from the Sale of Assets for
the three and six months ended December 31, 1998, attributing to a significant
portion of the increase in the revenue from the Sale of Assets for these period
compared to the same periods a year ago. The increase in the Company's earnings
from the Sale of Assets during the six months ended December 31, 1998 as
compared to the same period a year ago was also due to MINC generating more
business from the brokerage accounts it purchased from Index while at the same
time holding down the costs it takes to operate the business. The earnings for
the three months ended December 31, 1998, exclusive of the prior period
adjustments of $203,100, actually decreased $175,600 compared to the same period
a year ago, primarily due to a slow-down of the acquired business activity.
Total expenses were $2,137,600 and $4,220,000 during the three and six
months ended December 31, 1998, respectively, representing an increase of 5% for
the three months and a decrease of 6% for the six months ended December 31,
1998, respectively, when compared to the same periods a year ago. The increase
in the expense for the three months ended December 31, 1998 is largely due to
increased compensation expense related to the formation of CVI. This increase
was partially offset by the reduction in other expenses that resulted from a
refund of previously paid Value Added Tax to IFX Ltd. The decrease in the
expenses for the six months ended December 31, 1998 is largely attributable to a
reduction of consulting fees resulting from the Sale of Assets, and a reduction
of interest expense. The interest expense reduction resulted from the repayment
of debt which was outstanding during part of the quarter ended September 30,
1997, but which was paid off prior to the end of that quarter. The reduction in
expense was partially offset by the increase in rent and occupancy expense
resulting in large part due to a one-time brokerage fee paid by the Company to
sublet its office space in Chicago.
As a result of the aforementioned changes in revenues and expenses, net
income for the quarter ended December 31, 1998 is $649,100 or $.10 per share
compared to net income of $773,400 or $.12 per share for the quarter ended
December 31, 1997.
Net income for the six months ended December 31, 1998, was $1,472,200 or
$.24 per share, compared to net income of $1,661,100 or $.26 per share for the
same period a year ago.
16
<PAGE>
The Board of Directors has been exploring various business opportunities
for the Company now that FX Chicago, Inc. no longer acts as a futures commission
merchant, and as a result has capital available for investments. Based on its
evaluation, the Company has determined that the Internet and telecommunications
industries present the greatest opportunities for the Company's future
investment and growth, though the risks associated with these lines of business
are extremely high. Accordingly, the Company intends to pursue the development
and acquisition of Internet services and telecommunication businesses with the
proceeds from the Sale of Assets, joint ventures and private equity offerings.
In November 1998, the Company entered into an agreement with International
Technology to jointly acquire Internet services and make investments in
Internet-related businesses in Latin America and other international markets
through ENI. ENI, a wholly owned subsidiary of IFX, signed a letter of intent in
early January 1999 to acquire International Connection Service of Venezuela, a
comprehensive Internet Service Provider ("ISP") serving customers throughout
Venezuela. CVI, also a wholly owned subsidiary of IFX, was formed to serve as
the central network facilitator, managing, billing and administering all ISP
equipment and provider of related mergers and acquisitions expertise within the
Company at such time, if any, that ENI requires such services. In December 1998,
the Company, through its wholly owned subsidiary, IFX/Telcom, Inc., acquired a
limited partnership interest in Telcom.Net, L.P., a domestic telecommunications
and Internet software development company co-founded by Joel Eidelstein, the
Company's President.
Forward-Looking Statements
- --------------------------
Statements contained in this Form 10-Q regarding the Company's prospective
business opportunities, anticipated future results of operations and planned
expansion are forward-looking statements that involve substantial risks and
uncertainties. Such forward-looking statements include (i) the Company's belief
that it will not incur material costs or operational disruptions as a result of
Year 2000 problems that may be resident in its, or its customers' and suppliers'
computer information systems, (ii) potential changes in the projected future
business prospects and continued profitability of IFX Ltd.'s operations, (iii)
the Company's belief that the Internet and telecommunications industries present
profitable investment and growth opportunities for the Company and the Company's
abilities to succeed and be profitable in the development and acquisition of
Internet services and telecommunication businesses, (iv) the amount of future
revenues the Company expects to receive from MINC pursuant to the Sale of Assets
Agreement, (v) the amount and nature of planned capital expenditures, (vi) the
Company's belief that its existing cash, short-term investments, operating cash
flows, access to equity capital and borrowing capacity will be sufficient to
finance the Company's ongoing operations and future capital expenditures, and
(vii) statements relating to the Company or its operations that are preceded by
terms such as "anticipates", "expects", "believes" and similar expressions.
In accordance with the Private Securities Litigation Reform Act of 1995,
following are important factors that could cause the Company's actual results,
performance or achievements to differ materially from those implied by such
forward-looking statements: The Company has not determined (and may be unable to
determine) with certainty the magnitude and scope of any Year 2000 problems that
may be resident on its, or on its customers' or suppliers' information or non-
information systems. There can be no assurance that IFX Ltd. can maintain its
historic growth rate or profitability. The amount of revenues the Company
receives pursuant to the Sale of Assets agreement is dependent upon (i) the
amount of earnings MINC generates from the brokerage accounts it purchased from
Index and (ii) the contractual percentage of such earnings to which the
17
<PAGE>
Company is entitled, which is set forth in the agreement and decreases over
time. The Company cannot accurately predict how creation of a single European
currency and the implementation of the European Monetary Union will affect the
profitability of its foreign currency trading operations. The Company has never
conducted business in the telecommunications or Internet-related industries and
there can be no assurance that the Company's entrance into these industries will
be successful.
Item 3. - Quantitative and Qualitative Disclosures about Market Risk
The Company's exposure to market risk is directly related to its role,
through IFX Ltd., as a foreign exchange market maker in customer-related
transactions. IFX Ltd.'s primary market risk exposure relates to foreign
exchange rate risk. Foreign exchange rate risk arises from the possibility that
changes in foreign currency exchange rates will adversely impact the value of
the financial instruments. When IFX Ltd. buys or sells a foreign currency or a
financial instrument denominated in a foreign currency, exposure exists from the
net open currency position. Until selling or buying an equivalent amount of the
same currency covers the position, IFX Ltd. is exposed to the risk that the
exchange rate may move against it. In general, IFX Ltd. offsets it open customer
positions, thus substantially reducing its foreign exchange rate risk. IFX Ltd.
is also exposed to credit risk. Credit risk arises from the potential inability
of market counterparties, such as exchanges and banks, or customers to perform
an obligation in accordance with the terms of the contract. IFX Ltd. has
established policies and procedures to manage credit risk. A Credit Committee is
responsible for approving and reviewing new and existing customer accounts. The
Committee is responsible for establishing margin requirements and margin call
levels, position limits and trade restrictions (i.e., 1-month forward trading,
instrument types, etc.). The Finance Officer is responsible for monitoring all
customer accounts on a daily basis to ensure that they are in compliance with
the agreed terms of trading. Customer trading positions, equity balances, margin
excess amounts, and margin calls are monitored daily. As IFX Ltd. conducts the
majority of its business for its customers in foreign currencies on the spot
market, its trades generally settle on the next business day. However, if margin
calls are necessary and not satisfied in a timely manner, (i.e. within 5 days),
IFX Ltd. reserves the right to liquidate all or part of the customer's open
positions. Management believes that with trades settling the next business day
and the margin policies it employs, its credit risk is somewhat mitigated.
18
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
See Notes to Consolidated Financial Statements.
Item 5. Other Information
The Company's Annual Meeting of Shareholders was held on February 3, 1999.
All shareholders of record as of the close of business on December 14, 1998 were
entitled to receive notice of and to vote at the Company's 1998 Annual Meeting.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
11.1 Computation of earnings per Common Share
27 Financial Data Schedule (EDGAR only)
(B) REPORTS ON FORM 8-K
- On November 23, 1998, the Company filed a report on Form 8-K
reporting the agreement between International Technology Investments, LC, Lee
Casty and the Company.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IFX CORPORATION
--------------------------
(Registrant)
Dated: February 11, 1999 By: /S/ COLLEEN M. DOWNES
------------------------
Colleen M. Downes
Chief Financial Officer
20
<PAGE>
Exhibit 11.1
IFX CORPORATION AND SUBSIDIARIES
Computation of Earnings Per Common Share
as Restated for the One-for-Five Reverse Split of Common Stock
- Basic Earnings Per Share Computation
<TABLE>
<CAPTION>
Three Months Ended
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Earnings:
Net income $ 649,100 $ 773,400
========== ==========
Shares:
Weighted average number of
common shares outstanding 6,367,496 6,279,130
========== ==========
Earnings per common share:
Net income $ .10 $ .12
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Earnings:
Net income $1,472,200 $1,661,100
========== ==========
Shares:
Weighted average number of
common shares outstanding 6,261,517 6,279,130
========== ==========
Earnings per common share:
Net income $ .24 $ .26
========== ==========
</TABLE>
IFX CORPORATION AND SUBSIDIARIES
Computation of Earnings Per Common Share
as Restated for the One-for-Five Reverse Split of Common Stock
- Diluted Earnings Per Share Computation
<TABLE>
<CAPTION>
Three Months Ended
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Earnings:
Net income $ 649,100 $ 773,400
========== ==========
Shares:
Weighted average number of
common shares outstanding 7,501,891 6,279,130
========== ==========
Earnings per common share:
Net income $ .09 $ .12
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Earnings:
Net income $1,472,200 $1,661,100
========== ==========
Shares:
Weighted average number of
common shares outstanding 6,612,624 6,279,130
========== ==========
Earnings per common share:
Net income $ .22 $ .26
========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
IFX Corporation, Form 10-Q as of December 31, 1998 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-1999 JUN-30-1999
<PERIOD-START> OCT-01-1998 JUL-01-1998
<PERIOD-END> DEC-31-1998 DEC-31-1998
<CASH> 0 290,900
<SECURITIES> 0 39,779,600
<RECEIVABLES> 0 5,958,600
<ALLOWANCES> 0 (91,100)
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 45,938,000
<PP&E> 0 647,000
<DEPRECIATION> 0 (424,100)
<TOTAL-ASSETS> 0 47,872,000
<CURRENT-LIABILITIES> 0 32,048,300
<BONDS> 0 0
0 0
0 0
<COMMON> 0 133,100
<OTHER-SE> 0 13,674,300
<TOTAL-LIABILITY-AND-EQUITY> 0 47,872,000
<SALES> 91,500 334,900
<TOTAL-REVENUES> 3,341,800 6,887,300
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 1,786,100 3,524,300
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 351,500 695,700
<INCOME-PRETAX> 1,204,200 2,667,300
<INCOME-TAX> 455,900 945,300
<INCOME-CONTINUING> 649,100 1,472,200
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 649,100 1,472,200
<EPS-PRIMARY> .10 .24
<EPS-DILUTED> .09 .22
</TABLE>
